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Highlights: Structural change in manufacturing along income levels

Value added patterns

Figure 3.5 presents the estimated patterns of structural change within the manufacturing sector, illustrating how ten major manufacturing industries (based on the ISIC revision three at the two digit level) develop at different income stages. The vertical lines separate four development stages which exhibit distinct manufacturing structures. In the first stage, at very low income levels, there are commonly three industries which dominate the manufacturing sector: food and beverages, textiles and wearing apparel. These three industries are closely related to basic human needs, and usually exist before industrialisation ‘takes off’. In this ‘early’ stage, labour-intensive industries8 clearly have higher development potential in terms of value added, and their growth rates are also not much lower than those of emerging capital-intensive industries. The ebb and flow of labour-intensive and capital-intensive industries become apparent in the second stage. The slowdown of the labour-intensive industries becomes increasingly noticeable as the manufacturing structure gradually shifts from labour-intensive to capital-intensive orientation. By the time that countries reach around $10,000 GDP per capita, many capital-intensive industries start surpassing the value added levels of textiles and wearing-apparel industries. In the third stage, capital-intensive industries take a dominant position in terms of output. These industries, which include resource-processing industries such as basic and fabricated metals, as well as those which use such processed materials to produce final products including electrical machinery and motor vehicles, experience rapid growth. The difference between the growth rates of capital-intensive and labour intensive industries will be increasingly apparent in this stage.

Figure 3.5 Patterns of structural change within manufacturing, all countries. Source: UNIDO’s elaboration based on Penn World Tables Version 7.0 and UNIDO (2014).

In the final stage at a very high income levels, labour-intensive industries, except for the food and beverage industry, decline and even some capital-intensive industries, such as resourceprocessing industries, start slowing down. Those which tend to sustain fast growth of value added are the chemicals, machinery and equipment, and electrical machinery and apparatus industries. The development stages for all 18 manufacturing industries for which data are available are listed in Table 3.1. The early industries are mostly those which are relatively labour-intensive and/or are domestic-oriented industries. The middle industries include those which process natural resources to produce material inputs for other manufacturing industries. Finally, those that belong to the late industries tend to have a higher level of intensity in the application of technology and knowledge to production and, except for rubber and plastics, they produce capital or consumption goods for final use by firms or households. Figure 3.5 contains clear estimated curves for the development patterns of manufacturing industries. However, this might give a false sense that the reliabilities of estimation are the same among industries and across income levels. Challenges and risks facing countries vary according to the characteristics of industries and stages of development, in addition to country-specific factors. Thus, there will be a tendency for countries to deviate from the estimated line, with greater variations for certain industries and at certain stages of development. Figure 3.6 shows the estimated development patterns of industries with 95 per cent confidence intervals, indicating some important characteristics of manufacturing development. First of all, there are large differences between the performances of industries which play a crucial role in the relatively early stages of development. Textiles and wearing-apparel industries have wider confidence intervals around the estimated lines indicating a higher level of uncertainty with respect to the development of these industries. This suggests that risks facing countries are relatively high at early stages of development. The most difficult part of industrialisation can be to start it - that is, take-off of industrialisation.

A characteristic shared especially among middle and late industries is a high level of uncertainty in the early and mature stages of their development. As seen in Figure 3.6, their confidence intervals are wider at the lower and higher income ends, with a narrower interval for middle incomes. This suggests that at low incomes, when industrialisation is in its initial stages, country-specific conditions tend to have a significant influence over industrial development leading to a wider variance in performance between countries. However, after the industrial sector has taken off and has accumulated some experience the differences in performance between countries at the same income level become smaller. As countries come close to the end of the upper middle income stage (at around $15,000 GDP per capita in terms of PPP in 2005 constant prices) they again have wider differences in performance. The greater uncertainty in manufacturing development from this stage onwards is attributed to the fact that countries are graduating from manufacturing development based on the acquisition of existing technologies from advanced countries and are moving to a stage where they have to take more risks in generating knowledge and technology themselves in order to directly compete with technology leaders (Lee 2013). At high incomes, countries which are successful in invention and innovation can sustain high growth of some manufacturing industries, such as the machinery and equipment and electrical machinery and apparatus industries, as indicated by the upper bound of their confidence intervals. Continued growth of these industries will be important to avoid premature de-industrialisation, to promote technological development and to generate employment in manufacturing, as well as related service industries, so that the manufacturing industry continues to contribute to a country’s development.

Employment patterns

Figure 3.7 Patterns of employment change within manufacturing, all countries. Source: UNIDO’s elaboration based on Penn World Tables Version 8.0 and UNIDO (2014). Note: The employment/population ratio is expressed as employment divided by population multiplied by 100.

The development patterns of some industries have been changing over time as seen, for example, in the declining trend for value added in the textile industry in Figure 3.13. This declining trend is distinct from the decrease in the industry’s value added related to increases in individual country income per capita. The clear downward shifts of the curves for each of the four time periods shown in Figure 3.13 show a steady change in consumer demand and technology, which leads to lower value added per capita for textile industries at all income levels. This change in industry characteristics is related to changing consumer preferences for its products over time (i.e. time series analysis), which are distinctly different to demand and supply changes related to different income levels across countries at a particular point in time (i.e. cross-section analysis).

Emerging trends within the manufacturing sub-sector, reflected in shifting patterns of value added and employment, are summarised in Table 3.4 (based on the criteria indicated in the note to the table). The tobacco and textiles industries have experienced reductions in both value added and employment levels over time. In contrast, the rubber and plastics industry has experienced increasing levels of value added and employment, making the industry relatively more important than before. Many middle and late industries have been changing their production technologies in such a way as to increase capital intensity, substituting capital for labour. Furniture is the only industry which has become more labour-intensive, while the technological characteristics of the food and beverage industry have been stable over time.

Table 3.4 Emerging characteristics of manufacturing industries since 1980 Source: UNIDO (2013). Notes: Where value added and employment have shown a statistically significant increase in all three decades since 1980 the industry has been classified as ‘Rising’. Where an industry has shown consistent reductions in both variables it has been classified as ‘Declining’. Where an industry has shown increased value added but decreased (or at least not increased) employment it has been classified as ‘Intensifying capital use’. Where there is evidence of an increase in employment and a decrease, or no change, in value added it has been classified as ‘Intensifying labour use’. If there has been no significant change in industry value added and employment it has been classified as ‘Stable’.

Manufacturing labour productivity patterns by industries

Food and beverages

Tobacco

Textiles

Wearing apparel

Wood products

Paper

Printing and publishing

Coke and refined petroleum

Chemicals

Rubber and plastic

Non-metallic minerals

Basic metals

Fabricated metals

Machinery and equipment

Electrical machinery and apparatus

Precision instruments

Motor vehicles

Furniture, n.e.c.

Manufacturing value added patterns by industries

Food and beverages

Tobacco

Textiles

Wearing apparel

Wood products

Paper

Printing and publishing

Coke and refined petroleum

Chemicals

Rubber and plastic

Non-metallic minerals

Basic metals

Fabricated metals

Machinery and equipment

Electrical machinery and apparatus

Precision instruments

Motor vehicles

Furniture, n.e.c.

Manufacturing employment patterns by industries

Food and beverages

Tobacco

Textiles

Wearing apparel

Wood products

Paper

Printing and publishing

Coke and refined petroleum

Chemicals

Rubber and plastic

Non-metallic minerals

Basic metals

Fabricated metals

Machinery and equipment

Electrical machinery and apparatus

Precision instruments

Motor vehicles

Furniture, n.e.c.